Stop obsessing over Average Contract Value: the ACV needed for exit is only $14k

12/22/2016By Sammy Abdullah, CFA

Average Contract Value is important to know, but we’ve seen too many companies obsess over it as if it’s revenue or burn. Maximizing ACV shouldn’t be the goal and as you’ll see below, SaaS companies that do exit had a modest ACV of only $14k. ACV is a vanity metric that should be looked at as part of a group of ratios that include number of qualified leads, close ratio, sales cycle, and other critical sales metrics. It shouldn’t be put on a pedestal. Here is why:

-The world’s biggest and best software companies tend to have smaller ACV’s. Below is a data set of 37 publicly traded SaaS companies and their estimated ACV’s at exit/when they went public. To do the analysis, we looked at each Company’s financials before going public and compared their annual revenue to the number of customers at the end of the year to get an approximation of ACV (all contained in a filing called an S1). Upon going public/exiting, the median ACV was only $14,449. This makes sense as the universe of companies that can afford a lower ACV is much higher than those that can afford a $30,000+ ACV, so by focusing on a lower ACV, you can grow into a bigger company and exit faster.

Company

Ticker

Year (Revenue)

Revenue

Customers

Average Contract Size

Salesforce.com, Inc.

CRM

2003

$50,991,000

8,000

$6,374

NetSuite Inc.

N

2006

$67,202,000

5,300

$12,680

Athenahealth, Inc.

ATHN

2006

$75,812,833

10,500

$7,220

SPS Commerce, Inc.

SPSC

2008

$30,697,000

10,156

$3,023

RealPage, Inc.

RP

2009

$140,902,000

5,032

$28,001

BroadSoft, Inc.

BSFT

2009

$68,887,000

425

$162,087

IntraLinks Holdings, Inc.

IL

2009

$140,699,000

4,300

$32,721

Proofpoint, Inc.

PFPT

2010

$64,790,000

2,400

$26,996

Jive Software, Inc.

JIVE

2010

$46,268,000

635

$72,863

Cornerstone OnDemand, Inc.

CSOD

2010

$46,608,000

480

$97,100

Lifelock

LOCK

2011

$193,949,000

2,300,250

$84

Qualys, Inc.

QLYS

2011

$79,713,000

5,700

$13,985

ServiceNow, Inc.

NOW

2011

$128,072,000

974

$131,491

Fleetmatics Group PLC

FLTX

2012

$92,317,000

15,000

$6,154

Splunk, Inc.

SPLK

2012

$100,542,000

3,300

$30,467

Bazaarvoice, Inc.

BV

2012

$64,482,000

587

$109,850

WorkDay, Inc.

WDAY

2012

$199,128,000

325

$612,702

RingCentral, Inc.

RNG

2013

$135,941,000

300,000

$453

2U

TWOU

2013

$83,127,000

8

$10,390,875

Cvent, Inc.

CVT

2013

$89,584,000

6,200

$14,449

Five9, Inc.

FIVN

2013

$84,132,000

2,000

$42,066

Castlight Health, Inc.

CSLT

2013

$12,973,000

95

$136,558

Veeva Systems Inc.

VEEV

2013

$129,580,798

170

$762,240

Zendesk, Inc.

ZEN

2013

$72,045,000

38,951

$1,850

Hortonworks, Inc.

HDP

2013

$10,998,000

292

$37,664

Shopify

SHOP

2014

$123,556,000

162,261

$761

Mindbody, Inc

MB

2014

$76,620,000

42,000

$1,824

HubSpot, Inc.

HUBS

2014

$93,830,000

11,624

$8,072

Box, Inc.

BOX

2014

$124,192,000

34,000

$3,653

Appfolio, Inc.

APPF

2014

$53,685,000

10,744

$4,997

New Relic, Inc.

NEWR

2014

$84,732,000

10,590

$8,001

Instructure

INST

2014

$56,678,000

1,400

$40,484

Xactly

XTLY

2015

$61,111,000

194,000

$315

Twilio

TWLO

2015

$166,919,000

28,000

$5,961

Atlassian Corporation

TEAM

2015

$319,521,000

48,622

$6,572

Secureworks

SCWX

2015

$262,130,000

4,100

$63,934

Nutanix

NTNX

2015

$241,432,000

2,100

$114,968

Median

$14,449

-Increases in ACV aren’t free. Usually in order to increase ACV, it means some other metric of importance gets worse, for instance the sales cycle gets longer, the close ratio comes down, and the number of leads needed to complete a sale increases. This makes sense because to get higher ACV’s, you have to focus on larger clients which inevitably means more layers of management to achieve an approval, more time required to identify the decision maker, more layers of bureaucracy to fight through, etc.

-Salesforce’s pricing should be looked at as the standard. For enterprise customers, Salesforce has packages that are $25, $75, $150, and $300 per user per month. Salesforce’s most popular package is the $150 per user tier, so your product needs to be priced well within this tier, because many buyers will look to Salesforce as the cap: “why would we pay $X per user for that product when Salesforce is costing us $125 per user” is a common question any champion of your product will face. To maximize growth, we find that ACV needs to be well within the $125 per user mark (perhaps 30% of it at most).

ACV is a metric that should be monitored, but don’t change the way you sell in order to artificially increase it. While metrics like ACV are valuable, the real metrics you should be focused on are revenue and cash flow, and ACV is only one of many ways to impact both.